Question

Suppose you have $100 to spend and the price of x is $1, and the price...

Suppose you have $100 to spend and the price of x is $1, and the price of y is $2. Draw the budget constraint. Calculate the optimal level of x and y and show it on the budget constraint.

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Answer #1

Price of X is $1 and Y is $2. We have income ie M=100$

The equation of budget line is

p1x+p2y=m

x+2y=100 for the given question.

Plotting this on graph we get

Here if I decide to consume all of x, then i get to consume 100 units of X. If i consume all of Y , i get to consume 50 units of Y. Similarly all the combinations marked on the budget line in the diagram are the optimal bundles ie they satisfy the equation and the consumer is utilising his income completely when consuming any of it.

The optimal bundles are (0,50),(20,40),(40,30),(60,20),(80,10),(100,0) for (x,y)

(you can comment in case of any doubts )

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